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Fixed-Asset Implications Under the American Taxpayer Relief Act of 2012

By Marla K. Miller, CPA, J.D., LL.M., MBA, Philadelphia

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Tax Section

Editor:
Kevin D. Anderson, CPA, J.D.

Expenses
& Deductions

While much of the attention of the
recent fiscal cliff debate was focused on the increased
income tax rates for high-income individuals, there are many
provisions in the new legislation that are favorable to
businesses, particularly in the fixed-asset area. The
American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240,
which was signed on Jan. 2, 2013, provides many incentives
for businesses to expand and purchase assets, including the
extension of bonus depreciation, Sec. 179 small business
expensing, and shortened tax depreciation lives for
qualifying properties.

50% Bonus
Depreciation Extended for OneYear

Normally the cost of a capital asset is recoverable over
the life of the asset. To encourage investment, Congress
enacted bonus depreciation provisions that have allowed
taxpayers to accelerate recovery of the costs of purchasing
certain assets. The bonus deprecation amounts have varied
from 30% to 100%, with the most recent first-year
depreciation deduction being 50%. This favorable bonus
depreciation provision was set to expire on Dec. 31, 2012.
ATRA extended the 50% first-year bonus depreciation to
qualified property acquired and placed in service before
Jan. 1, 2014, and certain longer period production and
transportation properties are eligible for 50% bonus
depreciation through 2014 (Sec. 168(k)(2), as amended by
ATRA Section 331(a)).

Bonus depreciation is available
only for new property with respect to which the original use
commences with the taxpayer. In addition, it must be
property depreciated under the modified accelerated cost
recovery system (MACRS) that has a recovery period of 20
years or less, water utility property, computer software
depreciable over three years under Sec. 167(f), or qualified
leasehold improvement property. It also includes certain
property with a long production period as defined in Sec.
168(k)(2)(B). A taxpayer may elect out of the additional
first-year depreciation for any class of property for any
tax year. Also, the choice under Sec. 168(k)(4) to forgo
bonus depreciation in exchange for an increase in the
alternative minimum tax credit limitation was likewise
extended.

The extension of bonus depreciation in ATRA
is also beneficial for taxpayers purchasing a new vehicle.
The “luxury auto” rules severely limit the amount of
depreciation that can be taken on many vehicles. Under Sec.
280F, depreciation deductions that can be claimed for
passenger autos are subject to dollar limits that are
adjusted annually for inflation. For passenger automobiles,
the adjusted first-year limit in 2013 is $3,160 ($3,360 for
qualifying light trucks or vans). If bonus depreciation is
claimed, the amount that can be deducted is increased by
$8,000. Therefore, if bonus depreciation is claimed on a
passenger car in 2013, the allowable deduction is $11,160
($11,360 for qualifying light trucks or vans).

Favorable Recovery Periods for Qualified
Property

ATRA extended some of the shorter write-off
periods and accelerated deductions for certain types of
property. These industry-specific provisions include, among
others, special treatment for motorsports entertainment
complexes, business property on Indian reservations,
qualified restaurant buildings and improvements, qualified
retail improvements, and qualified leasehold
improvements.

ATRA retroactively extends for two years,
through 2013, a short seven-year cost recovery period for
motorsports entertainment complexes under Sec. 168(i)(15). A
motorsports entertainment complex is defined as a racing
track facility situated permanently on land that hosts one
or more racing events for automobiles, trucks, or
motorcycles during a 36-month period following the first day
of the month in which the facility is placed in service. The
events also must be open to the public for the price of
admission (Sec. 168(i)(15)).

ATRA also extends the
special depreciation recovery periods for qualified Indian
reservation property under Sec. 168(j). Generally, to
qualify this property must be used predominantly in the
active conduct of a trade or business within an Indian
reservation, which is not used outside the reservation on a
regular basis and was not acquired from a related person.
These shortened recovery periods, provided in a special
table, are in lieu of the generally applicable recovery
periods set forth in Sec. 168(c), and no alternative minimum
depreciation adjustments are required if the shorter
recovery periods are used. The provision retroactively
applies to property placed in service after Dec. 31, 2011,
and before Jan. 1, 2014.

Last, the 15-year
straight-line cost-recovery write-off for qualified
leasehold improvements, qualified retail improvements, and
qualified restaurant buildings and improvements was
reinstated and extended (Secs. 168(e)(3)(E) and (e)(8)(E)).
This applies retroactively for two years, through 2013, and
therefore applies to property placed in service after Dec.
31, 2011, and before Jan. 1, 2014.

The American Jobs
Creation Act of 2004, P.L. 108-357, created the 15-year
property category called “qualified restaurant property.”
This property includes a building, or an improvement to a
building, if more than half of its square footage is devoted
to preparing and serving meals. For example, a small
cafeteria in a bookstore will likely not qualify based on
the square footage requirement. Qualified restaurant
property can include a new building; this definition is more
expansive than the requirements for retail and leasehold
property.

“Qualified retail improvement property” was
first created as a MACRS property category in the Emergency
Economic Stabilization Act of 2008, P.L. 110-343. This
property includes improvements made to the interior of a
building more than three years after the building is placed
in service that is used as a retail store open to the
general public. Last, qualified leasehold improvement
property is generally defined as Sec. 1250 leasehold
improvements made to a commercial property by a lessor or a
lessee under a lease more than three years after the
commercial property was placed in service (Sec. 168(e)(6)).
Retroactively extending these three 15-year straight-line
cost recovery provisions will result in favorable
accelerated depreciation deductions. But for the extension
of these provisions, the property would be treated as
nonresidential real property and be depreciable over 39
years using the midmonth convention.

Small Business Expensing: Sec. 179 Expense

Sec. 179 allows businesses to write off some or all of
the acquisition costs of qualifying properties, as opposed
to depreciating them over the life of the asset. The annual
limitation was $500,000 in 2011 but dropped to $125,000 in
2012. It was expected to drop to $25,000 in 2013. While this
amount is the maximum amount that can be expensed, the
annual dollar amount is reduced dollar for dollar by the
amount that the taxpayer’s total investment exceeds the
annual investment limits. This annual investment limit
likewise has been decreasing. The amount was $2 million in
2011 and $500,000 in 2012, and it was expected to drop to
$200,000 in 2013.

There were concerns that these
reductions would hinder the desire for small businesses to
invest and further depress economic recovery. As a result,
ATRA retroactively reinstated the $500,000 limit for 2012
and continued this limit for 2013. In addition, the $2
million annual investment limit was retroactively reinstated
for 2012 and prospectively continued for 2013. ATRA also
extended the rule allowing taxpayers to expense
off-the-shelf computer software under Sec. 179. The
retroactive extension of the annual limitation and
investment limit may provide planning opportunities for an
immediate write-off of expenditures.

Impact on Taxpayers

Over the last
decade, depreciation provisions have changed almost
annually. ATRA extended many of these favorable provisions
through 2013. The future of these extenders will likely be
decided when, and if, Congress implements comprehensive tax
reform. These provisions, while advantageous to businesses,
merely shift the timing of when taxes are due. As such,
taxpayers need to plan and apply these changes correctly, as
they likely will have a significant impact on an entity’s
taxable income now and in future years.

EditorNotes

Kevin Anderson is a partner, National Tax Services, with
BDO USA LLP, in Bethesda, Md.

For additional information about these items, contact
Mr. Anderson at 301-634-0222 or kdanderson@bdo.com.

Unless otherwise noted,
contributors are members of or associated with BDO USA
LLP.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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